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Peer monitoring, social ties and moral hazard in group lending programmes: evidence from Eritrea

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  • Hermes, Niels
  • Lensink, Robert
  • Teki, Habteab Mehrteab

    (Groningen University)

Abstract

In this paper, we provide an empirical analysis of the impact of monitoring and social ties within group lending programs on moral hazard behavior of its participants, based on data from an extensive questionnaire held in Eritrea among participants of 102 groups. We find support for the fact that peer monitoring by and social ties of group leaders do help to reduce moral hazard behavior of group members. In contrast, peer monitoring by and social ties of other group members are not related to reducing the occurrence of moral hazard within groups.

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Paper provided by University of Groningen, Research Institute SOM (Systems, Organisations and Management) in its series Research Report with number 03E36.

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Date of creation: 2003
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Handle: RePEc:dgr:rugsom:03e36

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  1. Wydick, Bruce, 2001. "Group Lending under Dynamic Incentives as a Borrower Discipline Device," Review of Development Economics, Wiley Blackwell, vol. 5(3), pages 406-20, October.
  2. Matthew Warning & Elisabeth Sadoulet, 1998. "The performance of village intermediaries in rural credit delivery under changing penalty regimes: Evidence from Senegal," Journal of Development Studies, Taylor & Francis Journals, vol. 35(1), pages 115-138.
  3. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  4. Aryeetey, Ernest & Udry, Christopher, 1997. "The Characteristics of Informal Financial Markets in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(1), pages 161-203, March.
  5. Guinnane, T. & Banerjee, A. & Besley, T., 1993. "Thy Neighbor's Keeper: the Design of a Credit Cooperative with Theory and a Test," Papers 705, Yale - Economic Growth Center.
  6. Jonathan Conning, 2000. "Monitoring by Peers or by Delegates? Joint Liability Loans under Moral Hazard," Department of Economics Working Papers 2000-07, Department of Economics, Williams College.
  7. Ghatak, M. & Guinnane, T.W., 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Papers 791, Yale - Economic Growth Center.
  8. Armendariz de Aghion, Beatriz, 1999. "On the design of a credit agreement with peer monitoring," Journal of Development Economics, Elsevier, vol. 60(1), pages 79-104, October.
  9. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  10. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  11. Wydick, Bruce, 1999. "Can Social Cohesion Be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala," Economic Journal, Royal Economic Society, vol. 109(457), pages 463-75, July.
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Cited by:
  1. Thomas Dufhues & Gertrud Buchenrieder & Hoang Dinh Quoc, 2012. "Social capital and loan repayment performance in Northern Vietnam," Agricultural Economics, International Association of Agricultural Economists, vol. 43(3), pages 277-292, 05.
  2. Dalla Pellegrina, Lucia, 2011. "Microfinance and Investment: A Comparison with Bank and Informal Lending," World Development, Elsevier, vol. 39(6), pages 882-897, June.
  3. Gan, Li & Hernandez, Manuel A. & Liu, Yanyan, 2013. "Group lending with heterogeneous types:," IFPRI discussion papers 1268, International Food Policy Research Institute (IFPRI).
  4. Arvind Ashta & Marek Hudon, 2009. "To whom should we be fair? Ethical issues in Balancing Stakeholder Interests from Banco Compartamos Case Study," Working Papers CEB 09-036.RS, ULB -- Universite Libre de Bruxelles.
  5. Garikipati, Supriya, 2008. "The Impact of Lending to Women on Household Vulnerability and Women's Empowerment: Evidence from India," World Development, Elsevier, vol. 36(12), pages 2620-2642, December.
  6. Kugler, Maurice & Oppes, Rossella, 2005. "Collateral and risk sharing in group lending: evidence from an urban microcredit program," Discussion Paper Series In Economics And Econometrics 0504, Economics Division, School of Social Sciences, University of Southampton.
  7. Jeffrey Carpenter & Tyler Williams, 2010. "Moral hazard, peer monitoring, and microcredit: field experimental evidence from Paraguay," Working Papers 10-6, Federal Reserve Bank of Boston.
  8. Dufhues, Thomas & Buchenrieder, Gertrud & Quoc, Hoang Dinh & Munkung, Nuchanata, 2011. "Social capital and loan repayment performance in Southeast Asia," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 679-691.
  9. Remco Eijkel & Niels Hermes & Robert Lensink, 2011. "Group lending and the role of the group leader," Small Business Economics, Springer, vol. 36(3), pages 299-321, April.

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